WEAKNESSES

High share of agriculture in employment and GDP makes the economy vulnerable to weather conditions

Underdeveloped electricity and transport networks

Lack of skilled workforce

Dependent on concessional finance due to weak fiscal resources

Significant governance shortcomings, high levels of corruption

Poverty rate still high; low levels of spending on health and education

RISK ASSESSMENT

Growth is expected to remain dynamic in 2019

Growth is expected to continue to benefit from lively domestic demand supported by increased public spending and rapid wage growth (thanks to increases in the minimum wage), with private consumption representing 75% of GDP. Household disposable income will increase, even if the agriculture sector, which employs a quarter of the workforce, is still likely to suffer from weak agricultural commodity prices. Inflation will remain contained as the economy is largely dollarised, thus somewhat indirectly shielded from imported inflation in addition to inflation being moderated by US monetary policy tightening. Public investment will mainly target education, agriculture and infrastructure. Private investment is higher than public. China will remain a major investor in the country through PPP, but also fully Chinese projects. Other FDI are expected to continue to grow, especially in the textile sector, but to subsequently lose momentum in the medium-term because of rising wages and competition with neighbouring countries (especially Bangladesh and Myanmar) and uncertain access to the European Single Market. Manufacturing exports (over 90% of total exports), especially clothes and shoes, will continue to grow steadily. However, the external sector’s contribution to growth will be negated by the surge in imports. The services sector will continue to expand, thanks notably to the strong growth of the tourism sector and the casino gaming industry. The construction sector will also contribute to growth, thanks to Chinese investments, the booming property market, and the development of tourism infrastructure.

Substantial deficits, generating a dependence on external financing

The budget deficit is expected to widen because of higher spending. It will not be offset by revenues growth associated with the dynamism of the economy and the gradual improvement of tax collection. With the ruling party holding all seats in Parliament, the budget expansion was voted unanimously. It plans to expand the defence budget by 10% and social spending by 16%. The increased spending will largely rely on external financing; bilateral grants and concessionary loans, mainly from China and Russia, represent around 8% of public revenue. Consequently, the public debt burden will continue to increase. Almost completely externally held (half of it is owed to China) and denominated in foreign currency, it will remain sustainable in 2019 as it is largely based on concessional terms. Foreign exchange reserves are adequate, covering around six months of imports, or almost all of the external debt level.

Credit continues to grow rapidly, especially for real estate and construction. Meanwhile the banking sector remains weak because of inadequate supervision and a concentration of risks in the property sector. At the same time, the economy is highly dollarised with foreign currency accounting for almost all deposits, significantly exposing banks to exchange rate risks.

The current account deficit will remain large, mainly due to the continued rise in the trade deficit as the cost of imports of capital and intermediate goods and oil products increases faster than export prices. Tourism growth will help maintain a surplus in the balance of services. High levels of international aid and remittances by expatriate workers will offset the repatriation of dividends by foreign companies. Steady FDI inflows, especially from China and Japan, will make it possible to finance the current account deficit.

Ruling party wins all parliamentary seats in a sham of democracy and stability

Following the parliamentary elections of July 2018, the ruling Cambodian People's Party (CPP) regained all seats in Parliament. The elections were largely perceived by international monitors, the United States and European countries, as unfair and anti-democratic. The opposition had benefited from a weariness regarding Hun Sen's reign (Prime Minister since 1998) and acute social tensions over expropriations and poor working conditions in the textile sector. However, before the election, the government had dissolved the National Cambodia Rescue Party (CNRP), the main opposition party, banned 118 of its members from politics for five years, and imprisoned its leader on treason charges. Repression also targeted the media and NGOs. Later in 2018, Prime Minister Sen liberated some members of the opposition in a move that was perceived as a concession to critiques of the regime’s values – but even so, the EU announced a revision of Cambodia’s preferred access to the Single Market. Meanwhile, ties with China are strengthening, with the country becoming as a diplomatic ally and major investor in Cambodia.